Two thirds of buy-side firms expect to see significant movement to client-funded research funding models within the next two years, according to survey results from Substantive Research. Mike Carrodus, CEO, spoke to Global Trading to delve into the results.
Substantive Research conducted a survey of 35 large asset managers, with a combined AUM of more than US$11 trillion, to assess the buy-side appetite for investment research funding structure change. This follows FCA’s ‘Payment Optionality in Investment Research’ paper, published earlier this year, in itself a reaction to Rachel Kent’s Investment Research Review.
“Almost half [of respondents] think that there will be an equal mix of client-funded and P&L, which means one of two things,” Mike Carrodus, CEO of Substantive Research, told Global Trading. “Either some firms stay P&L and others make the move [to client-funded], or within budgets there’s some P&L and some client-funded. It would be a headache to administer, but it could be the way.”
Just over a third (35.3%) expect existing P&L firms to make no changes to their models, and only 17.6% predict the majority of budgets to move to a client-funded model. In terms of a time frame, there’s a three-way split. Some want to transition to a client-funded research budget rapidly, others want to wait and see, and a third group stated they will not make a change unless they are the only P&L research payers left.
“It’s not often that people have such different opinions about how things are going to unfold,” Carrodus commented.
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85% of those polled currently use a P&L research funding model, and more than three quarters stated that they did not expect to make changes to their research process. Carrodus explained that this suggests firms’ confidence in their underlying research, valuation and procurement processes. Making change is more related to disclosure, he added, while Substantive Research’s report noted that firms will have to change their disclosure in order to fully benefit from regulatory change.
More than half of those surveyed shared their belief that although the details need to be ironed out, suggested amendments to MiFID II will remove operational barriers to allow firms to charge end clients for the investment research they consume.
Hesitancy to be an early adopter is driven in part by strategy level disclosures and other requirements that could worsen the administrative burden, the firm explained.“The market needs an early adopter group, it needs to watch people go through [the transition] before they have the conviction to move,” Carrodus added. He suggested that small-to-medium US firms with London offices which are currently caught under MiFID II will be likely to jump first, creating momentum for others to follow.
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Looking ahead, “I don’t think there will be any big changes from now until the final rules,” Carrodus opined. “One issue is that currently UCITS aren’t included in this; for some firms, they’d need to see them included in order to move. The FCA has said that they’re going to get around to it eventually, but I think a lot of firms would rather it was in the summer rules when initial payment optionality comes into force.”
Concluding the report, he stated: “The key question remains: ‘How will end investor clients react to these returning costs, and how will asset managers’ adoption or avoidance of these new freedoms affect their competitive positioning?’
“What the buy side needs right now is a code – a set of standards that firms feel that they can sign up to. There will be different interpretations of the current wording of the FCA paper, and uncertainty on issues like what constitutes a ‘Strategy Level Budget’ and associated levels of disclosure. The buy side will want detailed frameworks to compare against, which the FCA can verify, ultimately providing more comfort to asset owners.”
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